Update: The Student Loan Debacle Worsens

Thank you to all the readers who expressed such an interest in the student loan section we had a few weeks ago.

It was one of our more popular sections ever and we were surprised at the amount of interest as well as support for some of our points. Typically, giving away money is popular, rather the criticism of it but we were gladdened that this was not the case in this instance.

Perhaps the current inflationary debacle - and the very real pain it is creating for individuals and families all over this country - is causing a certain amount of real discomfort when zany, untested and deeply unfair policy prescriptions are thrown around in an unconstitutional manner.

Nothing makes you less open to unorthodox economic ideas like experiencing other unorthodox ideas!

Since we published our last piece however, several more informed bodies have come out with their analyses of the Biden administration student loan forgiveness "plan."

The nonpartisan Congressional Budget Office (CBO) came out with their monthly budget review shortly after publication of our newsletter. In it they admitted that they are struggling to do their jobs and estimate the expenditures because of the new announcement by President Biden around student loans.

By stating this fact and explaining why, the CBO made three rather painful admissions.

  1. The student loan plan will add to the federal deficit.

  2. It isn't paid for.

  3. It may end up being far, far higher than the government's rosy estimates suggest.

Here is the CBO in its own words:

“Ordinarily, with just one month left in the fiscal year, projecting the annual deficit would be relatively straightforward."

This year, however:

"......the announced changes to the student loan program add significant uncertainty because they may lead to the recording of substantial outlays in September."

And finally:

"If significant numbers of student loans are modified in September, the 2022 deficit could be considerably larger than CBO has estimated. Some of the announced changes (such as the changes to income-driven repayment plans) will increase deficits in future years.”

Well then.

The whole episode is quite something. Typically when governments tell whoppers it at least takes a few years or at least a few quarters to be able to feel pretty confident that, no, those tax cuts for the rich or special interests are likely not going to pay for themselves.

Until then everyone just continues to repeat the stated fiction and hope against expectation that it might actually end up being true.

Not this year, however.

Now a nasty inconvenience like the truth isn't stopping the good folks in the White House though. Here is Bharat Ramamurti, Deputy Director of the White House National Economic Council explaining:

“This is paid for. It is paid for and far more by the amount of deficit reduction that we’re already on track for this year,” adding that “compared to the previous year, 1.7 trillion more dollars are coming into the Treasury than are going out.”

If you are perhaps struggling to follow this it seems that the Deputy Director is suggesting that because the deficit is coming down for reasons entirely unrelated to student loan forgiveness, they are therefore paid for.

The single largest reason the deficit is falling? The tax take is rising....

In fact, revenues have increased by nearly $800 billion this fiscal year so far, largely because of income growth, especially among high earners.

Here again is the Congressional Budget Office that helpfully estimated in May that revenue could hit as much as 19.6% of GDP, the highest level since wartime in 1945, except for fiscal 2000 before the dot-com crash when it hit 20%.

More tax revenue coming in this year may help pay for student loan forgiveness but it is not the same as "paying for it" in the sense that there is a plan to reliably assign funds from some new source of revenue that should be there, rain or shine in years ahead.

If the rain does come to the economy - something that is looking increasingly likely - then the extra revenue will disappear as even the wealthy make less money and pay fewer taxes. This will not then be "paid for." Rather it will be the exact opposite.

What is incredible about this lack of foresight is it won't necessarily take years. Rather, it may be as soon as next year. What will the administration plan be then? Will they have a way to raise revenue in a recession?

There isn't a plan and we know this because Congress was not asked to legislate one and it is, after all, the branch of government that is charged with securing funds for any outlay.

This is dangerous, dangerous ground. Launching trillion dollar entitlement programs without Congressional authorization is the exact type of thing that the US government - of any party - should NOT be able to do. The fact that it isn't "paid for" either and will likely cost over a trillion dollars, just makes it worse, not better.

We wonder whether the Democrats will approve when the Republicans decide they also don't need Congressional approval for their pet constituencies?

*******

Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.



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